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US Fed taking forceful action, says vice chairman

The Federal Reserve's aggressive and ongoing easing of monetary policy is warranted given the still-battered state of the US labor market, Fed Vice Chairman Janet Yellen said on Monday.

In an address to the politically influential AFL-CIO, the nation's largest labor group, Yellen, seen as a potential successor to Fed Chair Ben Bernanke next year, focused on the anomalously weak nature of the recent economic expansion.

"The gulf between maximum employment and the very difficult conditions workers face today helps explain the urgency behind the Federal Reserve's ongoing efforts to strengthen the recovery," Yellen said.

"We have taken, and are continuing to take, forceful action to increase the pace of economic growth and job creation."

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The US economy contracted slightly in the fourth quarter and, while that decline was seen as temporary, continues to grow at or below 2 per cent, far below the rate economists say is needed to bring down the 7.9 per cent jobless rate.

Yellen pointed to erratic US budget policy as one source of weakness in the recovery.

"I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past," she said.

In response to the deep financial crisis and recession of 2007-2009, the Fed lowered interest rates to effectively zero and bought over $US2 trillion in mortgage and Treasury securities in an effort to keep down long-term interest rates.

It began a new, open-ended round of $US85 billion monthly bond purchases in September.

Yellen argued that the primary cause of elevated unemployment is a shortage of demand due to the ebb and flow of the business cycle, not structural factors. That suggests monetary policy can be helpful to offset the labor market's troubles.

Long-term unemployment is a serious problem not only for those affected but also for the economy as a whole, Yellen said, since it could hurt the nation's growth potential.

Some analysts worry the Fed's stimulus policies will spark future inflation, but the central bank maintains it has all the tools it needs to remove liquidity from the financial system when the time comes.

Policymakers do not think that is any time soon. They have vowed to keep purchasing assets as long as the US employment outlook fails to make substantial improvement, and also to keep rates near zero until the unemployment rate falls to 6.5 per cent, as long as inflation remains under control.